A new catastrophe bond issuance has been launched to the ILS investor community, with a currently $100 million in size Fortius Re II Ltd. (Series 2017-1) transaction that seeks reinsurance against both property and workers compensation losses for subsidiaries of financial services group AmTrust.
This is the first full, broadly marketed catastrophe bond to be issued by AmTrust Financial Services we believe, although we know that this isn’t the companies first foray into ILS.
AmTrust has a special purpose reinsurance vehicle named Fortius Re Ltd., which was registered in 2014, and had entered into a number of private ILS transactions to support AmTrust subsidiaries reinsurance needs over the last few years. We understand some of these could be considered private cat bonds, but details are scant.
So this Fortius Re II Ltd. catastrophe bond is the first more broadly marketed 144a deal we’ve heard of from AmTrust, as it approaches the capital markets for fully-collateralized reinsurance using a newly registered special purpose vehicle.
Given we’re told that the Fortius Re II transaction aims to cover both property and workers compensation risks for AmTrust, it’s an innovative first entry into the full cat bond market for the firm.
Fortius Re II Ltd. will look to issue a single tranche of notes to ILS investors, with the Class 1 tranche currently targeting $100 million of reinsurance for the sponsor and its subsidiaries.
The Fortius Re II 2017-1 cat bond will provide AmTrust insurance subsidiaries with a source of U.S. named storm, U.S. earthquake and Canada earthquake reinsurance protection across a four-year term.
Interestingly, we’re told the transaction features two sections with shared limit across each of them.
The first, Section A, can be triggered by indemnity losses from all covered perils on a per-occurrence basis and provide property reinsurance protection.
The second Section B limit though, is exposed to modelled losses to a workers compensation portfolio due to earthquake impacts across the U.S. and Canada only also on a per-occurrence basis, so no named storm coverage here.
Effectively the multi-section, shared limit approach provides AmTrust with a way to gain two types of reinsurance coverage with different triggers, from one transaction, a clever way to structure a cat bond deal. With both sections providing per-occurrence based reinsurance protection it means only one can ever pay out, so investors are not exposed to both loss categories at the same time.
Of course this does make the work of analysing and modelling such a catastrophe bond harder for investors and may even limit the number of ILS funds and investors that would be capable of understanding the risks enough to participate, but given the sophistication of the ILS market now there are plenty of fund managers and investors that can.
We’re told that the $100 million tranche of notes to be issued by Fortius Re II will have an initial attachment probability of 1.83% and an expected loss of 1.11%. The majority of that is derived from the Section A indemnity risk, with 0.84% of the expected loss, while the modelled loss section contributes just 0.18% of the expected loss, we are told.
The Fortius Re II notes are being offered to ILS investors with coupon price guidance in a range from 4% to 4.5%, which is generous given the expected loss and likely compensates investors for supporting what is a more unusual cat bond coverage structure.
It’s encouraging to see the catastrophe bond market opening up to more of these shared limit deals and with this one finding a way to provide risk transfer both for indemnity property losses and modelled workers compensation losses, this Fortius Re II deal shows a way that the market could steadily bring incremental risk to the investor base through innovative structures.
Willis Towers Watson Securities is the sole structuring agent and bookrunner for this transaction, working alongside risk modeller AIR Worldwide.
We’ll keep you updated as the Fortius Re II Ltd. (Series 2017-1) catastrophe bond transaction proceeds to market and will update you along the way.
You can read about this and every other catastrophe bond transaction in the Artemis Deal Directory.
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